He is Chairman of Soros Fund Management LCC, a private investment managementfirm that serves as principal advisor to the Quantum Group of Funds. He is theauthor of The Crisis of Global Capitalism.When you, as an investor, as a trader, look out at the world, six months,nine months down the road, what kinds of things are you looking for?
The financial markets generally are unpredictable. So that one has to havedifferent scenarios ... The idea that you can actually predict what's going tohappen contradicts my way of looking at the market.
Actually, I see tremendous imbalance in the world. A very uneven playing field,which has gotten tilted very badly. I consider it unstable. At the same time, Idon't exactly see what is going to reverse it. Certainly, a slowdown in oureconomy would leave the world extremely vulnerable, because the U.S. economyis, today, the single engine that is driving this very big plane. So if thatengine were to conk out, you'd have a very serious problem. It's a question[of]: Can you repair the other engines before this one gives out? Because eventhough people say that we live in a new world, and the past is not relevant ...cyclical fluctuations are not eliminated. That's my main concern.
... I just want to clarify ... that what you have is a very uneven playingfield. You have excess liquidity at the center and a great deficiency ofcapital at the periphery. The money is still flowing from the periphery towardsthe center. So we ought to find a way to inject liquidity in the periphery.Instead of that, we can only inject liquidity at the center. The FederalReserve can lower interest rates, and has done so.
What you need is a mechanism to provide capital to countries like Brazil, whichis where money is fleeing. Interest rates are very high. The country is goinginto recession. So this is what creates a tremendous imbalance, at the moment,which is not sustainable. It could lead to ... if this engine now gives out,then you have a problem.
I mean, in fact, there is a certain danger that because of the injection ofliquidity, our financial markets have become overheated. You have signs ofspeculation, excessive speculation in areas like Internet stocks, and so on.You could conceivably have at some point a crash that would then have negativeeffects on the real economy ... In this country. And then, indirectly, on therest of the world ...
He is a Washington-based journalist who has worked in newspapers, magazinesand television for over 35 years. His most recent book is One World, Readyor Not, The Manic Logic of Global Capitalism.Many people think this crisis, that's been with us for the last 19, 20months, is over. What's your view?
My view is nobody knows yet whether this is over or not. But I would remindpeople, we've had three or four false dawns in the last two years where thenewspapers began reporting that recovery was in sight. Almost always thosejudgments were based, not on the real economies in the world, what people weredoing and producing and buying, but on financial indicators.
This present moment is very much based on some currencies in Asia that gothammered a year ago, have recovered a bit and now seem stable. Stock marketsare reviving in some countries. If you look at the real economies, what'sreally happening to industry and commerce in those countries, they're stillvery negative. So I will feel like we may be coming out of this when I stopseeing unemployment rising in those countries, stop seeing so many bankruptciesincreasing--indicators like that, the real health of the economy.
We have, what, 40% of the world in recession or depression still?
Yeah, and we have something like half the world in recession or depression. TheGerman economy, which is one of the big [ones], has been contracting for twoquarters now. People in Europe are very nervous about a European-widerecession. The U.S., it's true, keeps chugging along. On the other hand, wehave a negative personal savings rate. People are spending more than they'reearning, despite the fact that wages have been increasing. We have fallingprofit rates ...
If you were a person who had his or her retirement savings in the stockmarket, would you be worried?
Yes ... I'm among those who felt it was an inflated price bubble for a longtime, several years, and it keeps going up, defying all sorts of predictions.Nevertheless, one of two things has to happen. Either the stock market will godown considerably. We hope not all at once, but dramatically ... or thosepeople who have invested their money in the stock market are going to bedisappointed by the return. Just simply by the arithmetic--if you paid an overvalued price for a stock, you're going to get a smaller return than youanticipated. I don't think we can escape from one or two of thoseconsequences.
When people discover that that's the case, that they're not really going to getthat 12%, 15% appreciation in their money, maybe they will accept that maturelyand simply accept it. History tells us that that's not what happens. Whathappens is people say, "I'm getting my money out of here, because I'm notgetting what I thought I was promised by the market. So I'll put it somewhereelse." If a lot of people do that at once, then you've got a financial panicand crisis.
... ultimately, the problem in the stock markets--you can argue over whosenumbers you're using--but basically those stock markets are predicting acontinuation of extraordinary profit levels, double digit profits from companiesat the very time those profit rates are coming down and have been for a yearand a half now.
Somebody's got to be wrong. I don't think it's the companies. They can seewhat's happening ... The collapse in demand in overseas markets and the fallingcrisis for goods ... that put a squeeze on American companies even if theyaren't big overseas exporters, because you've got all these foreign goodspouring in here. It makes it impossible for a company to raise its prices.Probably it has to cut prices. That squeezes profits. If you squeeze profitslong enough, then the company's got to cut back on new investment. You seeyou're in a chain of bad events. That's where we are. Maybe we'll glide out ofit and bottom out and things will turn around, but I wouldn't bet my mortgageon that at this point.
Looking at the global economy, you think we're at a critical moment and thatwe have been for the last year or half year. What is your sense? What is itbased on?
The critical moment that faces the global system now is: Will governments bewise enough to learn from these catastrophic events and reform the system? Thatis, impose some rules on, particularly, global financial markets, but some otheraspects as well. Not to shut it down, but to keep it alive and moderate itspace and help countries protect themselves against the ravages of ficklefinanciers running in and out of their economy.
I am gloomy at the moment because I don't see much prospect of those reformsbeing done seriously in a timely manner. If they're not, then it is very clearthat we'll be back in crisis, whether that's six months or 18 months or twoyears from now, I don't know and nobody else could say. But the fundamentalsare now clear and we're not acting on them ...
He is a well known military strategist and consultant, and Senior Fellow at theCenter for Strategic and International Studies in Washington DC. He is theauthor of Turbo Capitalism: Winners and Losers in the Global Economy.Do you think the possibility of a global recession, if not depression, is avery real one right now?
As we speak, the possibility of a global recession is a very real one. On theone hand, you have the base of the world economy. You have the impoverishmentthat comes from very low commodity prices stretching from Wisconsin to Chile,Wisconsin pork bellies, Chile copper, everything in between, the oil inVenezuela, and so on. It affects entire countries ... Somebody should be outthere pumping demand into the system. Instead of pumping demand, we have theUnited States running a surplus because of the politics of it.
... Now, what was avoided would be the coherent, united, harmonious, and smartintervention by the authorities. Given what happened last October when thecrash took place, there were some waves and panic, and people were suddenlyafraid that they wouldn't have a pension, their mutual funds would disappear.People asked themselves how much money they still had invested in theold-fashioned way, you know, just by putting it in bonds and banks.
At that moment, there was no harmonious response. It was all done by theAmerican Federal Reserve. Alan Greenspan and the Federal Reserve acted.Everybody else talked or did nothing ... I don't think [the Federal Reserve is]going to be sufficient to prevent the [next] crash, which will come sooner orlater ...
... It's like having a great ball there on the top of an incline of a slope andwhen accelerated down, the only thing supporting it is just the FederalReserve, the American regulatory financial and control system, because noglobal mechanism has been set up; no coordination has really been set upbetween the American and the Europe and the Japanese economic controllingentities.
At most, there is a liaison between the central banks, but they only controlmonetary policy, so we have a contradiction here. We have a global economy withno global financial control mechanism. Therefore, a crash is only a questionof time.
He is the former Deputy Undersecretary of the Commerce Department under theClinton administration and is now president of an international advisory firm.He is also an adjunct professor of international and public affairs at ColumbiaUniversity.You ... [have] compared global economics to plate tectonics ...
... When you look at the global economy, one way to view it is using a platetectonic model where there are fault lines all the way around. When there's ashift of one of these fault lines, particularly a big shift, it can be felt allthe way around the world and we saw that last summer.
There was a fault line underneath the Russian economy. It shifted. The impactwas on Brazil where there was another fault line which shifted and caused aproblem throughout Latin America. You saw that with the Asian financial crisiswhere there were fault lines under a number of these economies that we resetinto disequilibrium as a result of too much capital and too manyforeign-denominated loans coming in while currencies were valued wrong ...Well, that fault line moved and what happened? Demand fell off enormously, andthat's how the energy was passed through this system of economic platetectonics, if you will, and it affected the countries of Latin America. Why?Because most of them export commodities--40% of Chile's exports is copper, and40% of their exports goes to Asia. So at that time all of a sudden you've got aconsequence in Chile.
Even to this day there are fault lines that could shift and could set offanother set of these things. Wall Street with an Internet bubble in the middleof it is a fault line. Japan with a weak financial system and uncertainty aboutwhether the government's latest round of reforms after round of reforms overthe course of the past decade, are going to work is another fault line. China,with the value of the yuan and whether they're going to devalue, is anotherfault line. A spreading war in Kosovo, a conflict in the Middle East near thesource of oil, these are fault lines that exist out there. We have to recognizethat in the global financial system right now these aren't isolated, thesearen't remote from us. They can affect us and they can affect other markets ina fairly immediate way.
So you don't think that this rolling crisis is over?
... Personally, I'm a little worried because I think there is a bubble in themiddle of the Wall Street economy. No one should have any confidence in theJapanese ability to fix their problems, because they haven't been able to do itso far and they haven't taken sufficiently dramatic steps, although they may.The Chinese could be spooked by a variety of other things and need exports toproduce hard currency ... We are still in an era or period in which confidenceis not restored, and until it is restored, until there is a deep sense thatwe're back on the upward track, we stand vulnerable to upsets like the upsetswe've seen in the past year.
Is there a danger that the wrong lessons are being drawn from the crisis ofthe last year and a half, two years?
... Not only is there a danger, there's a certainty that the wrong lessons arebeing drawn by some people. By most of the people at the center of theinternational financial system, are the wrong lessons being drawn? I don'tknow. I don't see the IMF being highly responsive to this. I don't see ithaving learned its lessons. I see that lending $5 billion more to Russia seemsto me to be at best an accounting transaction, at worst another waste of money.I see still an absence to be able to address questions of social equity in aneffective way, and so these things will take a while to formulate, but thegeneral trend within the markets is to be fairly thoughtful about this at thehighest levels, and there is a general movement toward understanding thingsbetter ...
Part of the problem is that in emerging markets, just as some of them are nothighly liquid financial markets, they are not highly liquid informationmarkets, and as a result a little bad information can cause quite an upset justas an inflow of too much money or an outflow of too much money can cause quitean upset of these markets.
So they're still volatile? They're still erratic?
Volatility is the toughest issue to deal with because the pipelines are gettingbigger and bigger through which money goes. It allows it to go in quickly. Itallows it to go out quickly. The amount of information people have allows themto make decisions very quickly. The mentality of a lot of these investors isnot a long-term mentality in terms of the portfolio investors, and volatilityis a big risk for a lot of these places. That's why you'll see some kind ofmodified capital controls in a lot of these countries growing even though thathas not been for a long time the policy of international financialinstitutions.
It's just inevitable in a medium- and a small-sized country that they want toprotect themselves against that kind of disequilibrium. You will always seegreed and self-interest drive markets to places that reason wouldn't.
He was a top portfolio manager for George Soros's Quantum Fund, a privateinvestment fund, from 1992 to 1995. He left the money management business in1996.It's like we're talking about some chess game in the sky. Most of us don'teven have any idea ... that this game is going on.
Yes, I think that's partially true. The nature of the abstract thinking that'sgoing on in the investment community is sometimes discernible through commentsyou see in the financial pages. But the way in which all of these prices thataffect employment and how goods are bought and sold and what countriesexperience boom and which countries are in stagnation, I don't think that thatconnection between how the investor-trader world is setting prices and then thereal consequences is well established.
Or well known to ordinary folks ...
... We're seeing Russia, much of Latin America, most of Asia, go throughepisodes in their economies, in their economic life, that are as deep anddamaging and painful and profound as the Great Depression was in the UnitedStates. At the same time, the United States is an economy which ischaracterized by its proportionately smaller exposure to international tradeand international influences, and our stock market's at an all-time high. We'reat a time when people are almost religious in their worship of markets. Themarket is now our master. If you espouse a social goal in America today,someone will say to you, "No, the market won't support that."
The market is a tool. We should have a political and social consensus on whatour objectives are as a society and use markets to facilitate that. But now theservant's the master. It's almost as if the market is a religious icon. I seethat mirrored in the very, very high valuation of the United States stockmarket and the tremendous conviction that citizens have throughout the countrythat the United States is good, is right. The free market is great, and thestock market is where you put your money.
People used to put their bank balances into gold or bank accounts or CDs,so-called safe things. The stock market was considered risky. Now the stockmarket is where everybody puts their money 'cause that's considered safe andlucrative. That's a bothersome notion to me. As I mentioned earlier, makingmoney is about changes in perception. Our society has such conviction now thatthe stock market is a good place. That perception is reflected in prices. Thechange in perception that's going to make stocks go up further is becoming evenmore optimistic.
... The ability for perception to change and change valuation in the stockmarket seems to me approaching the time when the only news that will bemeaningful is bad news. That will change your perception. That will make mydentist stop lecturing me about how I have to be in the stock market with allof my wealth because, four out of five years, it's better than bonds. We're ata dangerous point with regard to equities in the United States, and I mentionedit's a little bit like fiddling while Rome burns 'cause the world is strugglingall around us right now. And if the United States runs into a downward spiral,declining stock prices ...
Soros has said if things don't change, there is the real danger andpossibility that we are headed for a worldwide recession, if notdepression.
Yes.
Do you share that fear?
I think that George is accurate. There's an old saying by a now deceasedjournalist, American, named Christopher Lash, and he said, "Meritocracies areonly stable if a large number of people are winners. Otherwise they change therules."
In the economic outcome, if the United States is successful and the rest of theworld goes through the kind of transitions and violence that they have inrecent years, and that persists, and for instance, if the U.S. slows down,we've talked about it, and it amplifies the pain in other areas, they will notview themselves as bad performers in this system. They will try to change thesystem.
The nature of the trading system in the world and commerce is at risk in thecurrent time, because large number of people are suffering; large numbers ofpeople have had their lives disrupted and had their expectations about thecontinuity for growth and progress and employment and wealth accumulationshaken to its foundation. And that sows the seeds of political dissent and theimpetus to a change in the way the world is organized.
He is the Ford International Professor of International Economics at MIT.He specializes in international trade and finance and his most recent book isThe Return of Depression Economics.What is the biggest question in your mind today?
Oh, the biggest question is what about the big advanced countries? This is anenormous human tragedy. But so far, it's only affected people who didn't havethat much money to begin with. So in dollars and cents terms, it doesn't reallymatter that much. The question is: Can this thing spread to us? By us, I mean,basically, all the advanced countries, all of the rich, stable, democraticcountries of the first world.
So far, mostly it hasn't, but there are some scary things out there. TheJapanese are fairly close to entering into a deflationary spiral. The UnitedStates had one heck of a scare in the fall when the bond market froze. Iremember a Fed official in a private meeting, when people asked him what are wegoing to do about this, [he] said, "Pray," which was not very encouraging. Wegot out of that. We don't quite know how. So the scary question, the bigquestion is: How immune are the big advanced economies? I'd give you 10 to oneodds that it's not the 1930s over again for those economies, but those are notthe kinds of odds I'd like to be hearing.
Aren't we already seeing [people] in the oil industry, steel industry, inthis country beginning to feel the effects?
Yes. Clearly some groups are hurt, because they are dependent on those markets,or one way or another are directly in the path of this storm. On the whole, theUnited States' economy remains astonishingly prosperous in the face of what'sgoing on there. There's no necessary reason why that can't continue. But then,there was no necessary reason for any of this to happen. So you've got to beconcerned. The great revelation here is that we don't know what we're doing aswell as we thought we did. Problems we thought were solved are not solved.Economic analysts like me, economic managers like the people at Treasury,hopefully know something, but don't know as much as we thought we did. Thatmeans that problems that we thought were impossible may turn out to be quitereal in the modern world.
In your Foreign Affairs article, you talked about whether or notgovernments would take enough steps to stimulate demand at this moment...
If you look at two of the three great centers in the advanced world, Japan,first and foremost, and then also Europe, you start to wonder, what are theythinking? Look at Japan right now. It's an economy that's been shrinking forthe past two years. Prices are falling. Wages are falling, which never happens.You say, "Well, they must be moving heaven and earth to get that economy movingagain." The answer is, they aren't. They're spending a lot of money on publicworks, but they're not printing a lot of money. When the yen surged in valuefor complicated market reasons, which is a terrible thing for an economy that'son the verge of a deflationary spiral, the Japanese actually seem to be proudof it.
So that's scary. That's making me wonder, is it really possible that here inthe modern world, there are people who don't understand even that much and areprepared to take those kinds of risks with a big economy? If you look atEurope, where they talk about price stability and are sitting there again onthe edge of deflation, you wonder, are they prepared to do what's necessary?
Meaning, spend money?
Well, in particular, print money. You print money, and you spend money. Printmoney is the easier alternative and the preferred one, if you can do it. Again,the Europeans start to talk about the virtues of the strong Euro, which is thelast thing they need right now. What worries me about Japan and Europe is thepeople in charge seem to be like the old line about French generals, preparedto fight the last war. They remember very well the inflation of the 1970s andearly 1980s. They remember the excesses of speculation in their markets duringthe bubbly economy in Japan during the 1980s. Here, they are in a world whichis that world turned upside down, where the clear and present danger isdeflation, not inflation; where the problem is crashing asset prices, notovervalued ones. They don't seem to be prepared to make the mental shift. Andwhen they do, it might be too late.
Add into that mix the U.S. economy running a [budget] surplus. Isn't that aproblem at this moment in time?
... Well, so far that's not a problem, because U.S. consumers are making up forit. What happened is the U.S. government has gone from heavy dissaving tosubstantial saving. But U.S. consumers decided to stop saving altogether at thesame time, so it hasn't created a problem.
I'm less worried about the U.S. I don't think that we are a contractionaryforce in the world now, or are likely to be. And in Greenspan I trust--notreally, but the fact is, that the U.S., whatever criticisms you can make aboutit* policies and for the rest of the world, our domestic policies are moreflexible, more open minded, than that of anyplace else. That is one of ourgreat strengths ...
If Asia heads into depression and Europe is in a deflationary cycle, howlong do we think that we are protected?
Oh, we have to move fast. The world is not all that integrated. It is possibleto have prosperity in the U.S. while the rest of the world is in trouble. It'spossible in principle, but we'll have to move fast. If there is a slump thatspreads to the first world oustside the U.S., then we have got to cut interestrates, start spending that budget surplus ... The Great Depression would havebeen easy to stop in 1930. It was very hard to get out of by 1935. The pointis, that the time to act would be quickly. I think Washington understands that.Famous last words?
He is the Galen L. Stone Professor of International Trade at Harvard Universityand the Director of the Center for International Development. He has served asan economic advisor to governments in Latin American, Eastern Europe, Russia,Asia and Africa. A growing number of observers have pointed out similarities in certaintrends in the 1990s that were also trends in the 1930s. You've written someabout that yourself ...
There's a question whether 1999 is 1929. We had a booming stock market in 1929and then went into the world's greatest depression. We have a booming stockmarket in 1999. Will the bubble somehow burst, and then we enter depression?Well, some things are not different. The volatility of international capitalplayed a big role in the onset of the Great Depression. The volatility ofinternational capital is obviously destabilizing markets today.
There is, in my view, one fundamental difference, though. I think it really isso fundamental that the analogy doesn't hold in the end. In 1929, the world wason a gold standard. That meant that every major currency in the world waslinking the value of its currency to gold ... with the price of the currencyset to gold, you couldn't really do very much in terms of expanding the moneysupply in a depression, and so on. We only got out of the Great Depression ascountries got off the gold standard, which was a long, arduous, tumultuous and,eventually, tragic process.
The good news for 1999 is, we are not on a gold standard. We have independentnational currencies or regional currencies, in the case of the euro. If we didgo into a recession, something that's always possible for the U.S. or Europe,we could lower interest rates and expand the money supply without worryingabout the price of gold.
If the whole world went into recession, all the major central banks could cutinterest rates and expand the money supply. Indeed, last summer in 1998, whenthere was an intense moment of fear after the Russian default of a worldwidecredit crunch, the Federal Reserve Board cut interest rates several times andsuccessfully overcame that fear. I think that was important to a good monetarypolicy. So this is the big difference in my view. Could it happen again? Itwould take absolutely horrendous policy mistakes. The system itself is a lotsafer right now, because we are not bound by the straight jacket of the goldstandard.
Do you think that the stock market bubble, but more, the sense of Americanprosperity, is ever going to be affected by what is happening in the rest ofthe world?
The U.S. is in a bit of a euphoric mood. Euphorias come to an end. We hope theydon't come to an end with a recession, much less a crash. There's a lot ofstrength in the U.S., but there's a lot of froth also. The froth will blow off.We're going to have to face up to some realities that we're not fully facing upto right now.
Ten years ago, there was a lot of euphoria about Japan ... [and] fear in theU.S., that we're about to be taken over or fully owned by Japan. Well, this wasa lot of hysterical market misunderstanding. Opinions in markets just bounceoff of each other. We see it happening again.
The U.S. has a sound economy. It also has a cyclical economy. It also has stockmarket values right now that are hard to explain on historical norms. Whileit's always possible that everything can be based on the new economy, it's alsoquite possible that we're doing a little bit of exaggeration in just howwonderful things are.
Do you have any sense that Washington policy makers are reconsidering someof the policies? ...
I think within a limited range of issues, they're thinking, "What aboutexchange rate recommendations? What about short term capital flows?" There issome discussion of some real issues. The broader issue of the real role of theU.S., the foreign assistance aspect of that, who's going to pay for thesecurity of a global economy? No, we are not doing any broad rethinking rightnow. This is the end of an administration. That's usually a pretty terribletime for any real ambitious thinking.
Does that worry you?
I've been worried all through this decade. I'm more worried at the end of thedecade than I am at the beginning of the decade, because you have so many ofthe poor countries of the world in utter crisis right now. I don't see thatcrisis getting better. I don't see much real and serious attention. By serious,I mean something that might cost us something.
